It is generally accepted that real estate is a key element of wealth creation. As a factor of production, real estate generates passive income for its owner in the way of rents, royalties (for property that contains mineral resources) and capital gains from sales of the property to another purchaser at a higher price.
In a way, learning how to invest in real estate is like selecting a piece of chocolate from a box of chocolates. There are dozens (if not hundreds) of different ways to make money as a real estate investor, and it’s up to you to choose the niche you want to get into.Learning how to successfully invest in real estate is about choosing one niche and becoming a master of it.
This article is going to open up that box of chocolates for you to sample and let you see some of the most common niches you can get into when investing in real estate. Here are some strategies you can apply to build a real estate portfolio that will make you rich within a reasonable amount of time.
- Choose the type of real estate you prefer and understand the risks
The following list includes the most common property types that you are likely to deal with as a real estate investor.
- Raw Land: Raw land is nothing more than basic earth. Land on its own can be improved to add value, and it can be leased or rented to create cash flow. Land can also be subdivided and sold for profit. Some investors choose to buy raw land with hopes (or plans) that someday the land will become much more valuable due to external developments like the construction of an expressway or from a development being built nearby.
- Detached/Semi Detached/Terrace Houses: These buildings usually house single or multiple families (usually less than 5 in Nigeria). These homes are relatively easy to rent, easy to sell, and easy to finance. That said, in many areas, the rents derived from these homes won’t be sufficient to provide positive cash flow to offset the cost of construction. In such situations, it is better to invest in multiple family homes which provide much better cash flow as economies of scale may arise.
- Small Apartments: These properties often provide significant cash flow for the investor who can deal with the more management-intense nature of the properties. However they are significantly harder to finance and manage than the single family units. The value of these properties are based on the income they bring in. This creates a huge opportunity for adding value by increasing rent, decreasing expenses, and managing effectively. These properties are a great place to utilize property managers who manage and perform maintenance in exchange for a management fee.
- Commercial Property: Commercial investments can vary dramatically in size, style, and purpose, but ultimately involve a property that is leased to a business. Some commercial investors rent buildings to small local businesses, while others rent large spaces to supermarkets or big box megastores. While commercial properties often provide good cash flow and consistent payments, they also may carry with them much longer holding periods during times of vacancies; commercial property can often sit empty for many months or years. Unless you are starting from a very solid financial position, investing in commercial real estate is not recommended for beginners.
- Real Estate Investment Trusts: a REIT is to a real estate property as a mutual fund is to a stock. A large number of individuals pool their funds together, forming a REIT, and allow the REIT to purchase large real estate investments, such as shopping malls, large apartment complexes, skyscrapers, or bulk amounts of single family homes. The REIT then distributes profits to individual investors. This is one of the most hands-off approach to investing in Real Estate, but do not expect the returns found in hands-on investing. You can buy shares in a REIT via your stock account, and they often have a relatively high dividend payment.